Thursday, May 10, 2012

Taxing Capital

The Economist says economists are changing their minds, maybe capital should be taxed after all. From the article:

"For a generation, the profession’s message on capital taxes has been simple: the lower the better. Most economists would prefer no tax on capital income at all. This seeming fanaticism is rooted in sensible models, developed in the 1970s and 1980s and built on a pleasing simplicity. Taxation inevitably involves trade-offs. Governments tax in order to fund public goods and limit inequality, but taxes are no free lunch. People and businesses respond—a tax on carrots, say, reduces carrot consumption—and these responses distort the economy and may reduce its potential growth rate."

This led to a consensus that taxes on labor and consumption should increase while taxes on capital should decrease. This consensus has played out across the globe, encouraged along by capital owners and sympathetic political leaders. But now: "some economists are questioning the prevailing view, not least because reductions in capital-tax rates appear to have delivered more inequality than growth." The article discusses the recent scholarship, including by Piketty & Saez, and concludes:

"Fretting over high capital-tax rates still makes sense, not least because capital is highly mobile. If countries differ in their approach, firms may simply invest more in those with more congenial rates. But from a global perspective, as inequality rises, having taxes on capital income will look increasingly attractive—and, by some reckonings, more sensible than previously thought."

I think the jury is out with respect to whether firms respond to capital taxes as stated. It is certainly a surprise to see the Economist give any ground on this subject, even f it does preface with "by some reckonings."

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